“They create assets with a stroke of a pen and it takes five years to find out how good the assets are” — Donald Yacktman
Donald Yacktman: Background & bio
Don Yacktman joined the corporate world in the late 1960s after graduating with distinction from the Harvard Business School. His father who was a real estate developer offered him a lucrative job which was refused based on some of the conditions that were part of the bargain.
Yacktman joining the firm Stein Roe and Farnham in 1968 and was a portfolio manager for 14 years; however, the investor recalls his time there as being in vain since he was not able to follow his instincts despite the fact that his portfolio usually outperformed those of other managers.
In 1982, Yacktman was wooed by Vincent Chesley to manage Selected American Shares, a portfolio worth $76 million which he primarily managed using his investment mantra of selecting shares of small companies, referred to as “bargains”. This strategy recorded returns unheard of and the fund was valued at $400 million in 1990. He was subsequently named “Portfolio Manager of the Year” in 1991 by Morningstar.
Donald Yacktman initiated the The Yacktman Funds in 1992 after a successful stint as a portfolio manager at Vincent Chesley that ended when the company was acquired by Kemper.
Yacktman believes in picking smaller stocks after careful study, with the expectation they will grow in value once business operations are established and the company grows. Hence, he usually has a long term strategy in mind which has served him well over the years he has been in business, save for a few nasty occasions.
Donald Yacktman: The Yacktman Funds
Yacktman’s new company that he set up in 1992 was hugely popular amongst all kinds of investors who were reminisced about the returns that Yacktman had the potential to earn. Media coverage of his company was equally kind and Fortune deemed his funds as one of the ten that had the potential to “shine”. Similarly, US News and World Report termed his fund as one of the five that had would stand different from those of its competitors.
In 1993 however, some unfortunate events resulted in Yacktman’s stocks being out of favor. Almost 20% of the portfolio had been invested in pharmaceutical companies which crashed following announcements related to health care reform. As a result, in the year that the S&P 500 index gained 10%, Yacktman lost 6.6% of its capital. However, despite this performance, Yacktman refused to budge from his investment rationale and proudly proclaimed in a TV interview that this was the only strategy he knew that would make substantial money.
While his statement drew the ire of some investors, other’s admired him for his honesty and conviction which was quickly rewarded as his pharma stocks recovered their value and more in 1994 and beat the S&P 500 index. Through 1997, Yacktman’s fund continued on a path of simultaneously losing and winning money.
By 1998, The Yacktman Funds had some serious investors on board, and plenty of money was directed towards its accounts despite the fact that the fund was 17% behind the reference index. At the start of 1998, Yacktman was holding almost $1 billion in capital and was one of the most recommended funds.
However, the bottom was pulled from under him during the first half of 1998; the S&P 500 earned almost 18%; unfortunately, Yacktman’s fund massively trailed with a paltry 3.7% return. As a result, major investors began to redeem their investments which shook the management of the company to the core and badly damaged its reputation.
It also led to the Board at Yacktman doubting the interests of Don and Stephen Yacktman, followed by an overhaul of the Board Members. Although there were many reasons for the rift, the primary bone of contention was the deviation from the prospectus of the funds and its strategy.
Yacktman had always believed in the relative value of stocks which predominantly belonged to small companies and continued to partake actively in their trading whilst the prospectus advertised that the fund would participate in large cap stocks.
Despite the accusations and many investor redemptions later, Yacktman was able to hold his ground as 90% of the remaining shareholders demonstrated their confidence by voting against the Board. However, by 2000, Yacktman Funds had lost almost $70 million of its $1 billion portfolio by investing in small cap stocks.
Donald Yacktman: Investment philosophy
According to the information on the AMG Yacktman Funds website:
The Fund seeks long-term capital appreciation, and, to a lesser extent, current income. The Fund mainly invests in common stocks of United States companies of any size, some, but not all of which, pay dividends. Yacktman employs a disciplined investment strategy, buying growth companies at what it believes to be low prices. Yacktman believes this approach combines the best features of “growth” and “value” investing. When they purchase stocks, they generally search for companies they believe to possess one or more of the following three attributes: (1) good business; (2) shareholder-oriented management; or (3) low purchase price.
A good business may contain one or more of the following:
- High market share in principal product and/or service lines
- A high cash return on tangible assets
- Relatively low capital requirements, allowing a business to generate cash while growing
- Short customer repurchase cycles and long product cycles
- Unique franchise characteristics
Yacktman believes a shareholder-oriented management does not overcompensate itself and wisely allocates the cash the company generates. Yacktman looks for companies that:
- Reinvest in the business and still have excess cash
- Make synergistic acquisitions
- Buy back stock
Low Purchase Price
- Yacktman looks for a stock that sells for less than what an investor would pay to buy the whole company
- The stock prices of individual companies can vary significantly over short periods of time, and such price movements are not always correlated with changes in company fundamental performance. Accordingly, Yacktman generally prefers to wait for buying opportunities. Such opportunities do not always occur in correlation with overall market performance trends.
There has been plenty of coverage of Yacktman’s style of investing over the years. Barron’s did a great profile on him and how he likes to keep his distance from companies he builds a stake in.
Yacktman does most of his research over the internet and makes a point of not visiting the companies whose shares he buys or talking to management:
“…The danger of talking to managers is that they tell you what you want to hear, not necessarily what you want to know…”
Yacktman looks at stocks like they are bonds. If a bond [price] declines, its yield goes up. So if a stock declines, its forward rate of return goes up. Along these lines Yacktman equates the forward rate of return with a company’s free-cash yield. He calculates this yield by estimating how much cash the company has left after spending what it needs to maintain its business, then adds in the cash he believes it can generate through growth and adjusts for the effect of inflation. That figure is then divided by the stock price.
Using this adjusted cash flow figure, Yacktman compares the stock’s forward rate of return with yields on long-term Treasuries. Based on the spread between the two, he rates the stock. Deep discounts are the major factor that make or break a decision for Yacktman.
The years surrounding 2008 were busy for Yacktman, as the market tumbled during 2008, Yacktman was ready.
Donald Yacktman: Investments made during 2008
“When you have a disruptive period, think of it as a fruit tree that is shaking. Some of the fruit will drop to the ground. You can examine the fruit and see which ones you want…”
One of the fruits on the group was AmeriCredit, which makes subprime auto loans and issues asset-backed securities based on these loans. The stock fell to $7 during July of 2008 and trade at around 50% of book. Yacktman estimated the company’s forward rate of return at about 30% annually over several years. So the fund added to its existing position buying between $7 and $3.60. Returns on these purchases ranged from about 200% to more than 500%.
Similarly, Yacktman calculated that Barclays was undervalued by significant degree during January of 2009. The fund paid just $3.70 for Barclays’ ADR’s in January and sold them for $16.60 in April. A ROI of 348% in three months. Williams-Sonoma, was another quick return trade, purchased for $7 a share during November of 2008 and sold during the third quarter of 2009 for $18.25 — a 160% return.
Yacktman did fall into a few value traps. He took a 93% loss on American International Group, fortunately it was only a small holding.
Buying when the market is falling is something that Yacktman specializes in.
“Back in 1987, the day of the 500 point decline, I started buying like crazy … I spent $40 million that day.”
Right now, as you’ll see below, Yacktman is trying to build defensive positions to make the most of the market strength but protect against downside. He’s not finding many opportunities in today’s market but at the same time he’s not willing to go 100% in cash just yet.
Like most fund managers, Don Yacktman has a stubborn belief in his investment principles that he does not let go off even in the face of strong adversity. The fundamentals that Yacktman has held on to during his career adhere to small stock value investing. He believes that a successful trade is only to be had at a decent price, but blue chip companies are severely overpriced because of lower volatility and increased liquidity.
Donald Yacktman: Aversion to banks
Yacktman, like most other fund investors has demonstrated immense aversion to securities issued by banks, particular shares and stocks. This is because banks can create assets with a new policy or with a little lax in regulation from the Federal Reserve and thus present huge challenges at the analysis stage. While regulation has increased in the years since the financial crisis, there’s still plenty of debate about how banks calculated assets on their balance sheets. From the FT: Banks’ asset valuations come under fire.
Yacktman summarized his choices and said:
“They create assets with a stroke of a pen and it takes five years to find out how good the assets are”.
Top ten holdings as of September 2014
- PepsiCo, Inc. (NYSE:PEP)
- Procter & Gamble Co (NYSE:PG)
- The Coca-Cola Co (NYSE:KO)
- Cisco Systems, Inc. (NASDAQ:CSCO)
- Twenty-First Century Fox Inc (NASDAQ:FOXA)
- Microsoft Corporation (NASDAQ:MSFT)
- SYSCO Corporation (NYSE:SYY)
- Oracle Corporation (NYSE:ORCL)
- C.R. Bard, Inc. (NYSE:BCR)
- Johnson & Johnson (NYSE:JNJ)
(Note form 13F-HR does not include cash balances.)
Current holdings according to Gurufocus.
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